Regulation: Focusing on fintech

Words such as “innovation” and “experimentation” typically don’t jump to mind when you think of securities regulation. But that’s exactly what regulators have been focusing on over the past year in their efforts to keep pace with the fast-evolving financial services sector.

Barely more than a year ago, in October 2016, the Ontario Securities Commission (OSC) announced the creation of OSC LaunchPad, the first dedicated financial technology (fintech) unit at a Canadian regulator. The unit was founded to help fledgling technology-savvy firms navigate the often Byzantine world of securities regulation. At the time, the LaunchPad was an untested idea for regulators. Fast-forward to today and it has become a permanent fixture at the OSC.

According to Pat Chaukos, chief of the LaunchPad, the fact that the unit is a permanent part of the provincial regulator is “a testament to the OSC’s overall goal to modernize the regulatory experience for emerging businesses.”

The unit has been in high demand in its first year. Chaukos reports that during the past 12 months, the LaunchPad received more than 60 requests for support “from a variety of businesses, including those looking to offer digital trading, lending and crowdfunding platforms, bitcoin investment funds, token offerings and ‘regtech’ compliance solutions.”

In addition to being called on to help guide fintech firms through the thickets of securities regulation, the LaunchPad also has been building bridges between the regulatory community and the tech world, which otherwise wouldn’t cross paths very often.

The LaunchPad’s team has participated in more than 70 industry conferences and meet-and-greet events in the unit’s first year of operation, Chaukos reports. The team also hosted five “information days” for the fintech community. And the LaunchPad held one of the world’s first regulatory hackathons (RegHackTO) late last year.

On Nov. 10, the unit held its first event to connect with lawyers who specialize in fintech to discuss some of the major developments taking place at the awkward intersection of fintech and securities law. Over the past year, these included the development of regulatory thinking on cryptocurrency offerings (the Canadian Securities Administrators’ [CSA] issued guidance on the subject in late August) and the creation of the CSA’s so-called “regulatory sandbox” in February.

The CSA’s regulatory sandbox – an idea pioneered by several foreign regulators – allows firms to test innovative products and services, subject to certain restrictions, but without having to meet the full slate of existing regulatory requirements.

Already, a handful of companies have participated in the CSA’s sandbox and been allowed to test their ideas amid a combination of regulatory relief and special conditions imposed on their operations – highlighting the fact that regulators are grappling with how to accommodate novel businesses in the financial services sector, which is highly regulated and not given to dramatic innovation.

One of the ways in which the regulators have been seeking a balance between accommodating innovation and ensuring investor protection is by crafting novel conditions to impose on companies that are being granted regulatory relief.

For example, Angellist Advisors LLC, one of the first companies to graduate from the CSA’s regulatory sandbox, operates a platform to connect accredited investors with startups that are in need of either venture capital or angel investment. As a test case, the OSC granted Angellist time-limited registration as a restricted dealer in order to operate its platform in Ontario.

Among a variety of conditions placed on Angellist’s platform, the OSC requires that startups seeking capital via the platform participate in an approved incubator/accelerator program. These programs typically are funded by either governments or universities to help nurture companies in very early stages of development. From the CSA’s perspective, these programs also serve as a form of investor protection by providing some vetting of the firms that seek funding through the platform.

Similarly, another graduate from the CSA’s regulatory sandbox recently was granted relief to carry out an initial token offering (ITO), which includes the condition that prospective investors who wish to participate in the offering undergo “a comprehensive onboarding process” that features a survey to “ensure the investor has a detailed understanding of cryptocurrency and digital token offerings.” (See story above.)

The CSA is using these highly specific conditions as an experiment in finding new ways to ensure investor protection while also allowing companies to try out novel business models.

For now, the CSA is feeling its way through this process on a case-by-case basis. In the initial decisions to allow these sandbox firms to operate, the regulators stress that their rulings should not be viewed as precedents for other companies. The CSA has yet to lay out hard-and-fast frameworks for cryptocurrency offerings or angel investor platforms, for example. At this stage, decisions remain very fact-specific.

Yet, despite widespread legal and regulatory uncertainty, the focus on fintech is mounting. Ontario’s government recently created an advisory group devoted to developing the industry; Maureen Jensen, the OSC’s chairwoman and CEO, is a member of that group.